Thomas Hoenig garnered a bunch ofheadlines the other day for, as usual, making a provocative and hyperbolic statement about financial reform. Discussing the concept of systemically important financial institutions (known as SIFIs), Hoenig said:

“I suggest that the problem with SIFIs is they are fundamentally inconsistent with capitalism. They are inherently destabilizing to global markets and detrimental to world growth. So long as the concept of a SIFI exists, and there are institutions so powerful and considered so important that they require special support and different rules, the future of capitalism is at risk and our market economy is in peril.”

Oh no! The future of capitalism itself! Not surprisingly, Hoenig doesn’t explain this bizarre assertion; he just makes the provocative statement and moves on, which is par for the course for him. Of course, anyone who understands this issue beyond the level of superficial sound-bites knows that Hoenig’s claim is ill-informed nonsense.

It’s true that SIFIs are subject to “different rules” — they’re subject to more stringent regulations, and to more conservative capital requirements. They’re subject to a prompt corrective action (PCA) regime, liquidity requirements, resolution plans, enhanced public disclosures, and additional stress tests. (I know what you’re thinking: “How did the big banks convince Congress to shower them with all these goodies? Is there no end to the corruption?”)

SIFIs are also likely (though not automatically) subject to the Title IIresolution authority, which makes it easier for SIFIs to fail. The Title II resolution authority mirrors the FDIC’s resolution authority for commercial banks, except Title II is more stringent — e.g., unlike the resolution authority for commercial banks, Title II doesn’t permit “open-bank assistance” for SIFIs. And back during the nationalization debate, Hoenig was absolutely convinced that the resolution authority could successfully wind-down even the largest, most complex financial institutions.

So if SIFIs can in fact fail just like any other bank under the new resolution authority (which Hoenig has said they can), and the only difference between SIFIs and other banks is that SIFIs are subject to more stringent regulations, how exactly are SIFIs threatening the future of capitalism? The answer, of course, is that they’re not. This is just Hoenig looking to get in the papers by saying something mean about the Big Banks.

Just remember that Hoenig is also the guy who’s been warning about runaway inflation for the past two years, and who thinks the Fed shouldn’t “bring [unemployment] down too rapidly.” So take him seriously at your own peril.

Sorry I haven’t been able to post much lately; work has been very busy, and I’ve been on the road quite a bit. In the meantime, though, I urge everyone to check out Capitol Capitalist, a new blog on financial regulation by Sara Hanks. Hanks is a longtime securities lawyer, and also served as the General Counsel of the Congressional Oversight Panel (which was created to oversee TARP, and was led by Elizabeth Warren). So she absolutely knows her stuff.

Hanks described the blog to me as “a light-hearted and entertaining take on some very serious subjects, speculative rather than in-depth analysis, with a dollop of silly sci-fi references.” But based on the firstfewposts, which make several very astute points, I think she might be underselling the seriousness!

About Me

I'm a finance lawyer in New York. I used to focus on derivatives and structured finance (you know, back when there was a structured finance market). I spent the majority of my career at one of the major investment banks. My background is in economics and, unfortunately, politics.

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